Tag Archives: Make-Buy

10 Reasons Why Organisations Make Mistakes When Outsourcing

outsourcingAThe list of major outsourcing failures is extensive and demonstrates that many organisations are guilty of developing and implementing sub-optimal make-buy strategies.

The following provides 3 case examples where outsourcing has led to significant commercial and operational problems.

The NHS’ NPfIT project has seen estimated overruns of £7.6bn, inherent security problems, medical staff unhappy with proposals, and deadlines going out of the window. EDS, Fujitsu, CSC and Capital Care Alliance are amongst the names taking the blame.

Cable & Wireless outsourced global IT services to IBM. 14 months later a benchmarking process revealed an overcharge of £115m for UK operations alone. The dispute between C&W and Big Blue went all the way up to the High Court before being settled in an ‘amicable resolution’, but this meant that C&W could not insource again until after the agreement had expired.

The UK’s Department of Work and Pensions outsourced its IT to Microsoft and EDS. A worker decided to upgrade his desktop to Windows XP, but accidentally applied the changes to the entire network of 80,000 computers which all crashed. This is widely regarded as the worst computer crash in UK government history.

This short blog highlights the following 10 common reasons why organisations appear to make such mistakes when outsourcing:

  1. A lack of a robust and rigorous make-buy methodology that is consistently used by all staff throughout an organisation, with individual managers developing their own idiosyncratic approaches.
  2. A failure by managers at all levels within organisations to be trained in the basic principles of commercial exchange.
  3. A failure to understand pre- and post-contractual power and leverage, and its relationship to moral hazard and lock-in.
  4. Short-term decision-making that is focused primarily on financial headcount reductions and/or operational cost reduction, without consideration for the long-term strategic and operational consequences of this.
  5. A lack of cross-functional participation by all relevant managers and functions within the organisation.
  6. Decisions being made to protect or defend standard operating procedures and historic “turf” boundaries unrelated to a strategic or tactical understanding of value add in the business.
  7. A lack of iterative review of past outsourcing decisions, with a view to a flexible approach to re-insourcing or re-outsourcing past decisions.
  8. A failure to monitor market and supply chain circumstances externally once outsourcing has been undertaken.
  9. A failure to create proactive sourcing mechanisms to drive continuous performance improvement by the supplier once outsourced contracts have been awarded.
  10. A failure to create a robust exit strategy before entering into any outsourcing relationship.

Many companies think about make-buy issues infrequently and this leads managers to devise their make-buy (insource-outsource) methodologies on the spur of the moment. These are normally informed by a common-sense understanding of the key issues, but often without a proper understanding of the keys questions that must be asked about post-contractual moral hazard and lock-in.

Indeed, in over 30 years of working with public and private sector organisations it is very unusual to find those that have a rigorous and robust make-buy methodology that it is taught to all aspiring senior and middle managers in the business.

Many current make-buy decisions appear to be made in order to massage quarterly or annual returns by finding short-term cost reduction opportunities, without any real understanding of the medium to long-term post-contractual risks being entered into.

This is compounded by the fact that the decisions are often made by senior managers, who lack a basic understanding of the principles of commercial exchange, and who have decided what the answer is before the review is undertaken.

Such managers often decide to exclude from the decision-making process those with the necessary commercial knowledge, who are often the very managers who will be operationally responsible for managing any subsequently outsourced business relationships.

The Causes of Major Outsourcing Failures

Outsourcing. Business Background.Many organisations are guilty of sub-optimal strategies because they do not understand the potential pitfalls of outsourcing.

Managers are faced with an avalanche of advice about what they should do to be successful. The academic and consulting management literature is replete with articles and books that provide guides to success, with many case studies explaining why a particular individual or company was successful and what practitioners must do to emulate it in their own organisations.

This is not surprising, because practitioners are keen to find shortcuts and are desperate to emulate those who have been successful. Outsourcing is no different, as it has become something of a dominant approach as organisations seek ways of improving competitive advantage and bottom-line performance.

There are, however, problems with this approach.

  1. Practitioners copying what others have done can be dangerous if the emulator is not operating in exactly the same circumstances as the originator.
  2. A little knowledge can be dangerous. A cursory perusal may allow an emulator to understand in general what the originator did, but not fully to appreciate what was required to put it into practice successfully.

Given that emulators often fail to achieve the same success as originators, it is somewhat surprising that managers do not spend more time trying to understand why. Even more so because, from an early age, human beings do not normally learn by being told what is the correct thing to do. In fact, most of us learn from experience – that is, from making mistakes.

Most of the outsourcing decisions that IIAPS staff have analysed over the last two decades have been failures rather than successes.

By understanding what goes wrong strategically and tactically in outsourcing decisions, practitioners will be in a much better position to understand how to be successful. This is a radically different approach to the normal advice that practitioners receive.

An IIAPS White Paper highlights the major outsourcing failures that we have identified:
Pre-Contractual
1. Outsourcing strategically critical assets
2. Retaining tactically non-critical assets in-house
Post-Contractual
3. Failing to understand post-contractual “moral hazard” and lock-in
4. Inappropriate post-contractual relationship management

Each of these generic problems is outlined, with case studies to provide empirical evidence of the errors that organisations make on a fairly regular basis.

The Whitepaper also provides the 10 major reasons why organisations appear to make these mistakes when outsourcing and the 5 steps to successful outsourcing.

What is clear in practice is that, despite the many thousands of words written on the subject of outsourcing, most organisations we have worked with appear to be guilty of sub-optimal strategies. This is because practitioners do not fully understand the pitfalls of outsourcing.